Auditors, bank settles in lawsuit connected to $53 million fraud

CHICAGO – A $40 million settlement against two auditing firms and a bank for what one attorney called being “grossly negligent for over 20 years” hasn’t had many ripple effects for area auditors or municipalities.

Crystal Lake, with computerized systems and strong checks and balances, can’t be compared to the small northern Illinois city of Dixon, Crystal Lake Finance Director Mark Nannini said.

A town of about 15,000 people, Dixon was rocked by the news in April 2012 that its longtime comptroller, Rita Crundwell, had stolen $53 million over two decades.

Crundwell was sentenced to 19 years, 7 months in prison on Feb. 14 after pleading guilty to federal wire fraud.

She has since appealed her sentence. That appeal is ongoing.

Dixon had a manual system managed by one person, Nannini said. Crundwell controlled everything, even the mail, picking out the bank statement for the account she used to funnel money out of the city.

Regardless, the two auditing firms, CliftonLarsonAllen and Samuel S. Card, CPA, and the bank, Fifth Third Bank, should have noticed and investigated irregularities that should have uncovered the fraud, said Devon Bruce, a partner with Power, Rogers & Smith.

The Chicago-based firm represented the city of Dixon in its civil lawsuit.

“Clifton[LarsonAllen] did the audit, and part of the audit is to identify fraud, irregularities and theft in the city’s financial statements,” Bruce said. “That’s the duty and responsibility of an auditor. That’s why you pay auditors. That’s why they’re trained and licensed. That’s the purpose of an auditor.”

An audit does not mean everything is perfect, said Shelly Casella-Dercole, a partner at the McHenry-based accounting firm Eder, Casella & Co. They represent about 75 local governments.

“I think it’s probably hard for a regular person who’s not involved in an auditing process to understand what an audit is and what it isn’t,” she said.

The auditing process starts in the spring, Nannini said. For Crystal Lake, the auditors came to the city for a couple days at the end of April to do a preliminary review.

That’s when the auditors assess the city and determine where the risk areas are in an organization so that they can decide what kinds of tests are going to be performed and what areas they’re going to focus on.

“You don’t look at every single transaction,” Casella-Dercole said. “That’s not possible.”

Then they’ll come back for field work. For Crystal Lake, this part, which involves testing systems, reviewing documents and verifying checks and balances, started the second Monday of July and lasted three weeks, Nannini said.

Because government audits are a specialty, there aren’t a lot of firms qualified in any one place, Casella-Dercole said.

That makes rotating firms difficult, but governments can make sure the firm is doing a good job, spending the time at the entity and asking the questions they should be asking, she said.

CliftonLarsonAllen, which paid out $35.15 million of the collective $40 million, did not investigate the discrepancies in the false invoices Crundwell submitted to cover up the money she was taking, Bruce said.

The 179 fake invoices had misspellings, were for capital improvement projects that didn’t exist and didn’t give a contact person at the state to verify the invoice with, Bruce said.

But any one of these discrepancies could easily be dismissed, Casella-Dercole said. With everything moving online, not all invoices look the same anymore.

“It’s about knowing who your client is and getting a feel for them,” she said. “Are you dealing with people who are honest? Is there one red flag or 15? It’s more than, ‘Did the bank confirmation come back or did a statement have a contact?’”